April 2013

NORDICS: Looking abroad

ViewNordic values of openness and transparency have helped the country achieve economic success, and are in tune with European funds regulation. George Mitton reports. Avanti Wind Systems began life in 1885 as a factory making ladders in a backyard in downtown Copenhagen. It still makes ladders – as well as service lifts, climbing rails and personal safety equipment – but today its main products are intended for a specific application: maintenance of wind turbines. It may sound excessively specialised, but it is a good business to be supplying an industry erecting turbines in their thousands from the coast of Suffolk to the plains of China. Avanti is “an extreme example of a Danish niche business”, says Jan Johan Kühl, managing partner at Polaris, a Danish private equity house that owns the company. In fact, it is the type of company the Nordic countries have typically done well: efficient, competitive and, most importantly, global. Kühl says only eight of the firm’s employees work at the headquarters in Denmark. The other 250 produce the firm’s goods at factories in Germany, Spain, China and the US. It seems Avanti confirms a recent marketing slogan that, “in the future even the smallest business will be multinational”. This is nothing new in the Nordic states, though. Nordic companies have always looked abroad to find markets for their products and, as continental Europe flounders in a swamp of bad debts, their openness is a source of strength. Not only that, Nordic values of transparency and consensus seem uncannily in tune with the tone of regulation hitting the funds industry. EXPORT-LED
Nordic companies have for years tended to be outward-facing because their home markets are small. Companies in the export business have tended to dominate the economy, such as car marker Volvo or shipping giant Maersk. These firms have been pioneers in developing new markets; Ericsson sold telephones in China as long ago as the 1890s. In recent years, communications technology has allowed even small companies such as Avanti to spread themselves across continents. “The size of our economies and the history of being international creates the basis for creating strong niche companies,” says Kühl. Alongside this trend, or perhaps because of it, a culture has grown up of openness and transparency that allows Nordic companies to integrate easily with other economies. Anyone who has met well-travelled Swedes or Danes can attest to their often excellent language skills. They are also known as skilled negotiators due to a culture of consensus that forms the basis of political systems in the various Nordic states. It seems the rest of the world, and certainly the finance industry, is starting to appreciate the value of the Nordic model. “Look at Nordic values of transparency and equality,” says Jari Kivihuhta, chief executive at Nordea Investment Funds. “From a fund management point of view, it is where the market is going.” A shining example of the way Nordic values have dovetailed with European regulation is Ucits IV – the regulations that allow a fund to be marketed across borders. Because of their long history of openness to the global economy, Nordic fund companies were quick to realise the benefits of this “fund passporting”. By allowing them to distribute across Europe, Nordic managers can compete with asset managers in larger and less open economies that had hitherto been beyond their reach – a perfect model for small, export-led economies. Technical reasons make Ucits IV especially appealing to Nordic players. Third-party fund administrators in the Nordics are scarce and expensive. Many asset managers opt to do administration in-house, which is a drag on their profits. But under Ucits IV, asset managers can set up their funds in Luxembourg and hire a global administrator at competitive rates. “Our Nordic clients are setting up Ucits vehicles and looking to rationalise the number of funds they have and save costs,” says Håkan Valberg, president of Europe, Middle East and Africa at Advent Software. “They can have fewer funds and cover a large geographical area, which means less administration and more cost efficiency.” The Nordic countries are also well positioned on the question of pay for financial services workers, a subject that seems set to dominate the news in coming months. European regulators have signalled they will seek to limit bonuses to fund management staff, and require that rewards are deferred or paid in company stock to encourage better long-term planning. The push to limit excessive pay is unlikely to perturb the Nordic countries, which already have a much lower disparity between the wealth of the top and bottom earners. Redistributive taxation and a strong welfare state means Denmark, Norway, Finland and Sweden have among the highest levels of income equality in Europe, according to the Gini coefficient, a measurement of income inequality. The broader regulatory push for more transparency on issues such as fund costs, third-party risks and depositary liability also seems in tune with Nordic values. Nordic countries are highly advanced at providing citizens with access to official records, and frequently score high on the Press Freedom Index, compiled by Reporters Without Borders. Even great wealth has not changed their behaviour. Norway’s government pension fund, which looks after the country’s huge income from oil exports, scores ten out of ten on the Linaburg-Maduell transparency index, which measures transparency of sovereign wealth funds. Being export-led and open to foreign trade is not always a benefit, though. When the global economy took a hit in 2008, Nordic companies were among the first to feel the pain, while some more closed economies did not feel the full force of the financial crisis until months later. It was not a surprise. The Nordic economies have always been exposed to global market fluctuations and have been careful watchers of their currencies for that reason. However, some say the same forces that set the Nordics up for early pain helped them recover quickly. “We are used to reacting fast,” says Jonas Eriksson, communications officer at Skagen Funds. “When things turned, companies performed pretty well. The export-oriented companies in the Nordics are quite lean, they didn’t have to cut a lot of waste.” In Sweden, in particular, many attribute the strength of the economy to reforms made after a damaging banking crisis in 1992-93. To fix the problems, the government imposed tough losses on shareholders and nationalised bad banks. The government also began a number of reforms that would improve productivity and lead to gradual lowering of the state’s contribution to GDP. The result was that Sweden was better prepared for the financial crisis and did not have to implement state spending cuts in the midst of a recession, as many other European countries have tried to do. This stability has helped support the local economy and provided a strong base for the region’s small companies as they do the important work of searching the world for customers. ©2013 funds europe

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